Grain Futures Markets: What Have They Learned?

Taken together, studies that examine how well commodity futures markets
perform find that risk premiums are common—and so unbiasedness is not—and markets
are not uniformly efficient across commodities or forecast horizons. This large body of
research sheds important light on whether and to what extent commodity-futures markets
forecast optimally future spot prices and, so, enable commercials to manage price risk by
effectively parsing out much of it to speculators, a process that improves the total welfare
of an economy with competitive but otherwise-incomplete markets. Nevertheless, that
speculators can, in effect, improve welfare in this way has done little to quell popular
hostilities toward futures markets. Such hostilities—and, in particular, those directed at
speculators—in North America date to the inception of these markets in the nineteenth
century, and have contributed to the unflattering depiction of the early futures exchange
as an inchoate and poorly managed institution that initially served only the (illegitimate)
aspirations of gamblers, an original-sin creation narrative that surely compromises the
legitimacy of modern futures markets. Unfortunately, economists’ understanding of early
commodity-futures markets is particularly fragmented—the extant literature focuses
almost exclusively on the post-World War II era—and, as such, claims regarding the
performance of early futures markets remain largely unsubstantiated in any
quantitatively measurable sense. In this paper, I test and compare the efficiency
properties of wheat, corn, and oats futures prices on the Chicago Board of Trade (CBT)
from 1880 to 1890 and from 1997 to 2007. I demonstrate that, on balance, these nascent
nineteenth-century grain-futures markets were, like their contemporary counterparts in
this case, mostly efficient. As such, these results support the claims of early proponents
of futures markets who argued that the development of the futures exchange was shaped
primarily by commercial interests who sought to mitigate price risk.